Most property owners who have disposed of properties are aware of the role that bridging finance can play in providing liquidity for the period between when the sale is made to when the money finally arrives. Many companies also provide other property related forms* of bridging finance to realise the value locked up in the property. The standard or vanilla-type bridging finance that relates to the sale of a property fills the liquidity gap that can last a few months. Administrative issues, such as ensuring guarantees are in place, obtaining rates clearance and the like, all take time. In contrast, obtaining a bridging finance approval is a relatively quick and painless process. “Once they have the purchase and finance in place, it is pretty much a done deal for us,” says Jeffrey Froom of Prevance Bridging Finance. “We provide the funds upfront and we are usually paid back between 40 and 70 days later.”
Similarly, there is also a product available for individuals or companies that are taking out a further bond on their properties to access these funds as quickly as possible. In this instance, the money is once again bridged upfront while the sometimes lengthy registration process is completed. This form of bridging finance usually runs over a shorter term and is also used by estate agencies and individuals who may earn commissions running into the hundreds of thousands of rand, but which is only paid out upon registration. Through bridging finance, this money can be collected in advance. Froom’s company also offers specialised term loan products to release the value locked up inside properties. This form of bridging finance requires two things from the client, a defined payback mechanism and security.
When the loan application is made, the client defines the payback mechanism for a particular period, usually between six and nine months, and an exit strategy to provide reassurance as to how the money will be paid back.
“This money could come in from overseas, it could be from the sale of shares, it could be from a deal that they just pulled _off, or it could be from stock they just sold. It does not matter what the exit strategy or payment mechanism is, as long as they can prove to us where the money is coming from,” says Froom. “This is also a form of bridging finance, because they prove to us that they will be getting the money to pay us, back, but only in a few months’ time.” The security for this loan comes from the property owned by the entity. Security of two to one is taken, so if a R1 million loan is approved, security of R2 million is taken. This has to be unencumbered property where a first bond is then registered. Where a small bond still exists on the property, the bridging finance company would rather extinguish this bond and register a new one.
This security can be in any form, a farm, a commercial building, a house, a unit, or it could even consist of a number of different properties. The only requirement is that a first bond can be registered after an independent valuation has been completed.
The providers of bridging finance see themselves as financiers first and foremost and do not want to sell the property, which is why emphasis is placed on the exit strategy. This form of finance is popular with property developers who often need a few million rand to complete their development and put up a different property to bridge the finance gap. The sale of the newly completed properties provides the exit strategy in this instance. It is also used by those who register a large mother bond, but need to put down a few million rand of their own to unlock it, once again providing a perfect exit strategy. Many other business owners are also finding innovative uses for this product. “We have a client who has many invoices from suppliers, but is only paid every 30 days and needs cash flow. So, we register a bond over their property as security and they pay us back as the money comes in. It is a rolling facility, almost like invoice discounting.”
Because the bridging finance company has the title deeds, the loan can be repaid in full and the same property can be used as security when the need arises sometime in the future. There is no charge to keep the facility open in the interim. The business owner also does not have to take the full loan amount and is only charged on the amount actually withdrawn.
“You can almost fit anything into this finance product. It is very simple. You need a loan and we can give it to you as long as you have property as security and an exit strategy. lt could be old companies that have acquired property over the years that do not necessarily want to sell it but hang on to it for further growth.” As long as there is property in the background, business owners may be able to access cash where a bank loan may not be approved. Banks generally look at historic cash flows to determine whether a loan can be serviced, while bridging finance looks at future cash flows.
Bridging finance also has the advantage over banks in that it tends to move a lot quicker. In principle, a yes or no answer can be given to applicants in the first meeting. Bridging financiers also do not charge early settlement penalties.
